Putting it in perspective

Although today's employment figure is vital in determining the near-term trajectory of Fed policy (or at least market sentiment towards it), Macro Man hasn't had the time to devote to a proper preparation for it. Dues to a rather ugly family injury, he had to spend a decent chunk of yesterday in the emergency room and much of the rest of the day running errands and looking after the rest of a busy family.

It kind of puts it all into perspective; while things like payroll numbers are vitally important on a professional and financial level, it's important to remember that there are things that are more important if you want to be happy.

In any event, following the reflationary love-in this week, Macro Man's model expects a sobering splash of cold water come 8.30 am EST:

That forecast of 123k is the lowest in nearly three years. Obviously wages and the unemployment rate are also key, but this forecast has got Macro Man sufficiently concerned about some of his front end shorts that he's slapped a couple of hedges on. Hopefully he won't see as much blood today as he did yesterday....

V sorry to hear MM. But assume all under control now as I know that as a v caring sharing dad there is no way you would have written anything if thngs were still bad.

Your NFP call has spurred me into action, sample biased of course by your stunning call last . We have had notable gains overnight in China and the likes of copper ( again) but the risks of a friday reversal afetr a trend week triggered by a 'whoops there' NFP are enough to have me trim lots. I am still really concerned that the market isexpecting far too much from Draghi next week too. So add that to LBs observations of toppy and I m happier trim.

Best to the family, good thing you arent in the UK, they'd have had social services round there auditing your health and safety for child negligence

Ahead of NFP all is quiet, suddenly equities break higher... it's reported that Chinese Premier Li is speaking, that the govt supported the stock market today with state-backed funds buying equities (you couldn't make this up). Dax now up 1%.

I hope the wife is okay MM. (I'm projecting from your use of the word 'errands' - I'll make another foolcast...a knife in the kitchen. Obviously Polemic is sensing the same with his prolific use of 'trimming' and 'cutting' of positions though he doesn't consciously know it).

By the way, I read somewhere there was no growth in withholding taxes.

Dalio said the Fed could raise interest rates by another 25 basis points, but such a move would be a "serious mistake."

“The next big move I believe will have to be toward quantitative easing, rather than a big tightening. The recent developments have surprised the Fed, because it is not paying enough attention to the long-term debt cycle", he said.

Dalio has warned for some time that the economy is at the end of a long-term debt cycle, characterized by a lack of spending despite interest rates near zero or even negative. As lower interest rates and quantitative easing become less efficient in stimulating growth, Dalio said the next step will be to encourage spending directly. That step, he said, could take various forms, from monetizing government debt to sending cash directly to consumers.

“If you look around the world, our risk is not inflation and our risk is not overheating economies," he said.

Maybe if Dalio weren't too busy extorting tax breaks from Connecticut municipalities he'd see a case for a fiscal response to the issue, rather than another failed monetary response. Oh, but that might mean that his seventy bajillion bonds might go down in value, so can't have that now can we?

Mark my words, one day we will see the simultaneous policy of raising interest rates AND QE at the same time. In effect, it would involve a rate increase followed by QE (as opposed to first reversing that rate increase). So it'll happen almost by accident rather than a deliberate policy response, but I think they will like what they see, dress it up as a 'plan' and continue on its path.

It is the only way that more of our money can be made non interest bearing (back to post WWII levels) whilst bringing capitalism back with an interest rate.

But yes, a fiscal repsonse too is essential, including, importantly, a steady asset reset to reverse the process of concentration.

MM - good luck with the situation at home. Having had some scares in the recent past I can relate, and yes, after a lifetime doing this it unfortunately takes rather a lot, and usually bad stuff, to pry our thoughts off the markets. Hopefully it will all revert to normalcy fairly quickly. On NFP certainly none of the other data (claims, ADP, challenger) pointed to a dismal surprise - we will see. I am thinking 180k. Re: Dalio, fed policy etc - the idea that CB's are the only cavalry, and a helpless one at that, is very deeply entrenched now. Far from the 'omnipotence of CB's' claimed by many, I have to cover my ears everyday being reminded how out of bullets they are. It's weird - hearing all these comments from hedge fund honchos is like watching 10 alpha(!) males with assault weapons ducking under the table bracing themselves for what a sickly unarmed kid with glasses may do to them.

Ignoring the day-to-day meanderings of our respective casinos, this year is already beginning to have a very 'cuspy' feel to it. (I use the word in its non-Oxford Dictionary / I've just chosen to turn a noun into an adjective because it's my right to do what I want with the language sort of way, rather than it's proper IT / well-written and functionally sound programme sort of way - but I guess a crowd as smart as this already worked that out.)

Totally agree with MM that it takes the serious and unexpected to put life into proper perspective. All the best to MM and family on that front.

Interesting day ahead...in reading today I notice that global services seems to be following what we've noticed in manufacturing. I wonder if this weakness is global, and if we can avoid that fate. I'm sure all here have read today's econ numbers. It would seem to me that the strong law of large numbers means we get assimilated too...

given the margin of error and the size of the labor force 100-300k outliers are noise ....trend has been decent and as suggested if wage growth and participation rate pick up rates are going to get hit...

Missed it by a mile. Where do they get these numbers from? As always, hours worked and hourly wages are key, and those measures actually fell. Reflationistas may want to curb their enthusiasm for a day or two.

i win NFP bingo by sucking the least.That labor participation is a doozy - clearly its possible for laid off oil rig workers and sundry heavy industry technicians to learn coding,waiting tables, and bartending. Very interesting indeedMM I got your next article's title right here - U-S-A, U-S-A...

Wow, i was worried to be unemployed in Europe eventually... it's simple, just move to USA.Time to sell Emerging Mkts now, rally has gone too far with Brazil & co... uncertainty about FED path is huge now...

As always, it will be quite interesting to see which component of this jobs report Mr Market decides to pay attention to. So far the reaction in Spoos, US10y and FX has been surprisingly muted, as though Mr Market is saying "Really? Really? YGTBFKM", or in UK terms "Pull the other one, will you, it's got bells on!".

Today may be a tug o' war between Fast Money taking some off the table after a week of Killing It on the long side, and Real Money slowly and perhaps misguidedly lumbering into segments of the market that have been under-owned.

Crude still contained below $35. The longer it fails to breach that line, the more likely becomes a sharp reversal.

TBS... HUGE news in Brazil, they have LULA in for questioning. He is the center of all the greed and corruption.

Thank you for ticking 2000 S&P...

What kind of fireworks do we expect from China over the weekend? CNY and AUD apparently think something

5 & 10 year US interest rates certainly look like they did a nice range test and now look poised to go test the other side, purely from a technical point of view. Wouldnt that add to an already crazy year. And higher US rates would be accompanied with a lower dollar apparently (look at gold and EM FX) ..

@MM, don't worry, my shape isn't so good too..i've spent too much time in front of this monitors being nervous than doing my best on a saddle..as every year in october i bought a trainer and after using it two times i'm reselling it... it's not for me, but i understand that weather sometimes and somewhere obliges it

Just wondering.... if I was the PBoC I might sneak in a little devaluation here, over this weekend or next, while things are quiet. Perhaps a smaller one than was originally contemplated. China needs stimulus, and knowing them it will probably be monetary and fiscal. Not necessarily a huge negative for Chinese equities if they do this, but we may see a negative reaction elsewhere.

Only a thought. The intent is clear, only the precise timing of the event remains to be determined. Better here with EMs just now riding high than at a later time when markets are once again under duress.

"If the Fed chooses to pass and they're really data dependent and we get through this soft patch and the economy goes back to where the Fed had thought it would be for the year, I think the markets need to anticipate that being data dependent means the Fed may have to catch up," Plosser told CNBC's " Squawk Box ."

Oooh,,they've pulled Plosser out already this morning. Bond strategies must be getting harder and harder...nothing seems to be getting easier to figure out.

The most interesting data for me this week was yesterdays BAML flows reporting that even after this rally cash levels are mountainous and bear sentiment only just above 2011 levels.. jeez.. implies plenty more index chasing even from these levels.

The dash for trash continues. Either some players are getting monumentally squeezed (see SDRL) or there is some serious buying going on. US Steel bonds jumped from 50 to 74 in a month. At the start of genuine rallys its very common to see ppl talking about it just being a short squeeze and then later on it morphs into a genuine trend, so please remember that point.

Beaten down stocks/bonds are just on a tear. More than just a dead cat bounce IMO

I'm waiting to get hit short at 2020...scared, the way good trades are supposed to be.

We are just a tiny little bit more cautious over here at Hammock Asset Management. $vix hit its low this morning for 2016, just above 16, but then bounced hard and actually finished higher on the day, so perhaps the stampede of vol selling we had predicted is coming to an end now. We have already reviewed the overbought indicators like McClellan, Bolly bands etc...

We are going into next week with some modest protection and we were also trimming back some of our exposure in the emerging markets, gold miners and energy space today, especially in our Brazilian holdings. [insert jokes about shaving, trimming and Brazilian exposure here, if so desired]. It is rarely a bad idea to reduce a little when an asset has rocketed 25% in a few days. We are back to 23% equity exposure, loads of cash, no bonds and have a few little hedges on.

It has been a seriously stonking week for us over here. We suspect that next week might be a little more circumspect, but let's see what happens. We are seeing a few horned sheep out there all of a sudden, and financial media ladies are suddenly throwing their knickers in the direction of all the reflation trades, so all of that's a bit of a concern heading into the weekend.

Gotta feel pity for all the bears being short-squeezed. Equities now nearly green for the year, panic buying at every session... only a month ago many here were calling for a collapse in equities - they really couldn't have been more wrong. No wonder Nico left...

I bit early for the George Bush-esque "Mission Accomplished" meme re. avoiding a collapse in equities. Forward looking data is, at best, lukewarm, with inflection points in ISM services, car sales etc. And the only thing supporting commodities is a heroin-like stimulus injection in China. Do you really think that is going to change anything there for more than a few months, at best? The prospect of reverting to 10%+ GDP growth there, on the back of an even bigger credit and housing bubble seem a bit far fetched, in light of their substantial structural issues.

Given where valuations are, the odds are against substantial upside, based on historical experience.

I guess it really comes down to whether we are talking about day trading, or investing for a longer horizon. Just saying.

Two ways Mr Market can go from here. He can surge on mindlessly, incinerating shorts in order to fill the New Year gap and crap up there at SPX 2040, or he can show us a fairly significant pull-back to support levels, most likely scenario being a 2-3% move down to the SPX 1940-1950 level and the 50 day average. We do think that plunges to new lows are off the table for the time being, due in large part to a complete lack of wage inflation in the US and hence limited fear of Fed tightening. In any case the risk/reward ratio is decidedly less attractive and so our long exposure is limited.

Treasuries seem to be temporarily untradable, so we are going to stay well away, at least until the recent love fest with junk comes to an end. Remember that HY spreads to Treasuries have traded in lock step with oil, and keep an eye on that.

Re anon,7.38, I've been bullish and holding value stocks for a while. Im still long though looking to hedge some out and maybe go short an index.

I'd be a lot more bullish if financials pick up a bid. Starting to, especially with rates creeping higher and hy bouncing. But just looking Lt at s&p chart it's hard to get really bullish until we make and hold new highs. Which I am skeptical of.

If you go back to jan and early feb, you'd see I was pretty bullish, though I guess not enough on commodities.

Re anon,7.38, I've been bullish and holding value stocks for a while. Im still long though looking to hedge some out and maybe go short an index.

I'd be a lot more bullish if financials pick up a bid. Starting to, especially with rates creeping higher and hy bouncing. But just looking Lt at s&p chart it's hard to get really bullish until we make and hold new highs. Which I am skeptical of.

If you go back to jan and early feb, you'd see I was pretty bullish, though I guess not enough on commodities.

anon 10:13 PM: what do you mean "it really comes down to whether we are talking about day trading..."

Look at the charts/data - we've just had a massive 3 week rally in equities & some of the strongest moves in several years in some areas. Oil and commodities are bid. The FX space is seeing the highest vol in 3 years. That's not day-trading. That's a fundamental shift in behavior. Let's cut the nonsense here. The equity bears were totally wrong (again!) and have hemorrhaged money if they held any positions. Anyone who thinks equities are not going higher is clearly blind.

Going higher till they don't. Multiple uncertainties remain:CNY, oil prices, HY, fed rates, USD direction, Brexit, US election noise etc.Mkts have gone from panic to complacency (?)I think the current rally in risk will run out of steam at some point and turn down again, similar to price action fr late Aug to Jan.Massive rally? Bear market rallies are among the sharpest. And I don't see how high FX vols translate into a risk on environment, I would think the opposite. I think we see a break of SPX 1800 this year. I could be wrong of course (have been many times before =D) so will neither btfd nor stfr, but rather gwtf

FWIW, one of my relatives runs a yellow iron import business in China, and in the last few weeks after Chinese new year when demand is traditionally the highest, business has been very lukewarm (i.e. no pickup compared to past year or 2) so if there is renewed commods demand it isnt coming out of China construction sector.

Direction in specific pairs would in general signal risk on. But what is your time frame - d/w/m/q/y? What I meant by environment was longer term, ie quarterly/yearly. If we're in a fundamental shift to a new higher vol FX environment (in the longer term sense quarterly / yearly) I don't think it would be an unalloyed equity bullish environment. DXY is still in the 2015 range, but looks like it's gonna break the upside sooner rather than later. May? DXY 2013 - 2016 Mar http://imgur.com/gallery/wOwa4YiDon't think continued USD strength is eq friendly at all. Continued pressure on CNY and US exporters among other things. That's how it looks to me now but I could be wrong and DXY could break downwards (QE4 anyone?) or range (Fed on hold?)

Well, with the fed meeting coming up later this month, I think I've learned one thing. What was the result of the quarter point tightening? You got it, boys.

D. Absolutely nothing.

Yes, after all the gnashing of teeth and the pulling of heir, what did we observe? The dollar went up, the dollar went down. Interest rates didn't do a whole lot, but have trended lower, and now trending back up. China didn't fall off into the ocean, nor did they get rid of their messes. Etc.

The reason of course, is that we are at the absolute lower bound of rates, so a small increase is sound and fury signifying nothing. If the fed tightens this month another quarter point, what will the result be? You got it...gnashing of teeth, pulling of hair...but economically, absolutely nothing. Rates are too damn low for tinkering around zero to mean anything...

BinT - no disagreement on real economy impacts, but would like to point out that in Q4 there was a sizable camp that believed the Fed wouldn't even be able to logistically manage a 25 bps increase because the mechanism had broken down and reverse repos would be an abject failure, leading to turbulence of various sorts - ironically we have gotten oodles of turbulence, but its had nothing to do with the NY Feds management of the rate regime. My point is that the 25 bps increase at least proved that a 25 bps increase was possible.

Yes, washed, it was possible, and my point is that it didn't lead to the end of the world as we know it because rates are still severely abnormally low, so rate increases basically mean very little...

Productivity?

http://acrossthecurve.com/?p=25082

Explaining the Decline in Productivity

"A trio of economists from the Federal Reserve and the International Monetary Fund think they have the answer and it’s not particularly pretty. They argue in a new paper that the down-shift in productivity is for real. It’s not a mirage of mis-measurement by government statisticians unable to keep up with rapidly changing technology.

To show how important that conclusion is, the paper’s authors cite one telling statistic. U.S. gross domestic product would have been about $3 trillion higher in real, inflation-adjusted terms in 2015 if productivity hadn’t slowed over the last decade."

..I am still pondering what this means for the US if this continues....

Pol, and others, what do you think of the yen clearly shunning CB efforts to do more non conventional intervention. Seems to me that yen risk is perhaps a canary....also I noticed the yen started strengthening before the equity bear in 2007. Any thoughts if fx had it early the last time and might have it early again.

On commodities, while <30 oil is probably too low, going above 50 or 60 is likely to induce US supply. And other base commodities, especially steel and iron ore have absurd amount of excess capacity. They might be cheap and due for a good bounce but this isn't the start of a new cycle for a long long time. Copper is more interesting, apparently supply shocks in 2017-2018 ...

The road to hell...the Fed will march in lock step to BOJ and ECB actions. ECB will now lower their negative interest rates even more. Japan will follow with something of similar magnitude. China must react and either let the float the yuan or sharply devalue. Fed will follow with a neutral bias, then an easing bias and finally easing. If China floats the yuan. it won't be too long before the Fed reacts with negative interest rates.

“People of privilege will always risk their complete destruction rather than surrender any material part of their advantage.” – John Kenneth Galbraith – The Age of Uncertainty

Never meant the post on bounces to be analogous. There are many different reasons for this bear market ( which will resume shortly ), but mainly, it is that global trade prices/volumes are rolling over. You have to go back to the 1870s and 1930s to understand what is happening right now.

I'm a banker, not an professional runner of money. But I want to share a thought, as an external, and somewhat detached observer.

I'm surprised by the degree to which commentary on boards like this have been self referential. It seems to me that market participants have become one big circular reference. SPX being driven by oil; oil being driven by SPX, as an example. Which is the cause and which is the result appears to depend on which market participant you ask.

The quants calculate correlation after correlation, the vast majority of which are inter-financial market dependencies. My guess is that financial metrics are easy to measure, which is why they drive the markets, at least in the short term.

But has anyone stepped away from their monitor, and perhaps took a stroll in the real world for a while to see what is happening there? In the long term, what happens in the real world dictates the fate of capital markets. I get the feeling that a lot of market participants can't grasp this basic truth. Not sure whether it is their vanity that causes them to place themselves (and finance) at the centre of the universe, or ignorance of reality caused by too much time in front of a computer. Financial markets can facilitate commerce, but they are not commerce in and of themselves.

It is a lack of understanding of what is happening in the real world that is causing these massive swings in the market. Momentum chasing is becoming more and more amplified, as peoples' understanding of what is happening in the real world becomes weaker and weaker. Market participants basically have no confidence in anything. I suppose what I am really saying is that markets are becoming detached from fundamentals. Is it just me, or is this detachment getting worse from what we have seen historically? Regardless, this is very unhealthy for markets themselves.

So, what are swings in the Yen, or the Yuan or the price of oil or HY spreads or SPX levels really telling us? These are just polls of a very highly concentrated bunch of group thinking money managers. Someone said it recently on these boards: markets are extremely poor predictors of the future. If all we are doing is trying to guess what everyone else is going to do, sooner or later, the whole thing has to fall apart, once someone notices that the Emperor really has no clothes.

I know that you guys (and gals) are pros and read this to make money. Not sure how you can monetize my conjecture, but wanted to offer it up regardless. Incidentally, MM, this is one of the most intelligent commentaries on markets that I have found on the web, and thank you and all of the regular contributors for making it possible.

Bingo. Correlation is circular intraspective naval gazing when it is all within the cell membrane of the financial product organism. But beyond discussing which asset is leading which, I agree that the real world is what should be driving it. . To that point I refer back to my suncreme solar output ref above. These things are not driven by each other but by a greater external force. And how do we or are we meant to watch what is going on in the real world? Economic data and statistics from all sorts of strange sources are the telescopes of the finanical astronomers, but the problem with them is that they, like astronomical telescopes, only give us signals in selective wavelengths (those that each economic stat is tuned to) and even then the signal is old as it originated lightyears away.

One thing we havent had for a while on this board are the anecdotal, on the street, what your dinner party non financial mates are talking about, type nuggets.

Canuck, your input is most welcome if you wish to further eloborate on what you are seeing out there please do share

Anecdotes: Smaller energy co.s are under stress. Ppl are getting laid off in oil services. Singapore retail is suffering, increasing vacant units in malls, where there used to be none. Resi rentals are down. Real estate transactions are down. HK prime retail rental down sharply. China capital goods demand down sharply. Phil ofw remittances are down and workers in the ME are not getting contracts renewed.

@Washed: I am a corporate banker for largest of large caps, if you want to situate my perspective. "Whole thing" and "Emperor" are references to markets generally, with the implicit support of the CBs being the unspoken behind the curtain puppet master. I don't mean that in a ZH conspiratorial way... only that having swelled balance sheets by trillions, they have (IMHO) massively distorted markets to the point where we don't even know what "natural", undistorted markets even look like anymore.

In terms of ground truth, here are a few direct observations:

1. On Canadian banks. Direct exposure to energy sector is probably understated, but not potentially fatal to any of the Canadian banks. I'm much, much more worried about the impact of the massive real estate bubbles in Vancouver and Toronto. These markets have been in rally mode since the 1990s. The average Joe here could easily substitute for the average American in 2006, with the iron clad belief that "housing never goes down." It truly is an example of those ignorant of history being doomed to repeat it. House prices have gone up by multiples, but incomes have been stagnant, if not falling. Leverage levels are higher than in the US prior to their RE crash in 2008. The smugness of anyone who works in real estate, construction or related areas is nauseating. I can only imagine that it is the same in Australia. How much longer can this go on?!

2. CAD. See point #1 above about the real estate market. Changes in RE are going to have an equal or bigger impact on the economy than the resource sector. The Canadian private sector has only 3 pillars: mining, energy and real estate/construction. (Everything else has been acquired by global multinationals. Note that these three sectors are the only ones that can't be picked up and carried away.) So, if we don't expect resources to recover in any meaningful way, there remains the possibility of substantial downside in Canadian GDP (and accordingly rates, and the CAD), if the residential RE market cracks. I am bearish on the CAD at these levels.

3. Canadian equity markets are very, very slow. Here we are heavily resource focused, and the junior space is trading in the basement. Boutique investment banks dominated the junior space, and almost all of them have be shuttered. That is an indicator of something in the resource space. 2016 is looking worse that 2015.

4. Notwithstanding the importance of China in driving resource economics, it is astonishing how little everyone here knows about China. It is a black hole that, when everyone is happy clappy (to quote LB) is the justification for why trees will grow to the sky. "Don't worry, there will always be a huge demand for commodities because of the 1.5B people in China need them..." That is the full extent of folks' understanding. The sadest part is that I live across the tracks from a substantial collection of $10MM+ houses built by people who pumped and dumped junior resource names for the last decade and have made multi-generational wealth based on selling this story.

5. Banking generally: Bank funding costs have increased substantially. For Canadian banks, I would say that the net costs of making corporate loans has doubled over the past few months. The loan market has not had a corresponding price adjustment. I suppose that it is just a matter of time, but right now, a lot of the loan book is underwater.

@MM: I'm not the expert, but my understanding is that it is a combination of concern about their resource exposure, and a higher reliance upon wholesale funding markets versus global peers. Spreads have come in over the past couple of weeks, I would note. Last week saw some bank issuance to take advantage of better market tone.

Canuk, here in NZ the multiple Chinese bidders against each other for property has stopped (combination of KYC bank acc and inland revenue number now required for property purchase and perhaps tighter control of capital leaving China). In Aussie especially Sydney property is at eye watering high prices and I read that in China primary city apartments are on a rip... maybe money cant get out so goes into Chinese property....

NZ Diary farmers have a technical breakeven of about $5.20 nz per kg of milk solids and the current forcast for this coming year is about $4.25. I wonder how long they will be allowed to capitalise losses before there is an issue....

Meanwhile in NZ tourism is going gang busters, perhaps because of our perceived safe distance from world hotspots?

Yet the NZD is 0.6766 as the algo's chase their tails.... I have been working in front office (non trading) for about 20 years, I have never seen the participants so doubtful of their own industry and whats about to happen next.